This past week world financial markets saw historic moves! The S&P 500 had its best October since 1974. I remember the period of 1974 most vividly as it was known as the October crash. This October saw records broken in many of the major indices as a percent move in one month. Frankly, I have not seen the market go from bearish to bullish in a long time. This could either be the fastest short covering rally ever seen or the start of one of the biggest bull markets. I have to say after looking at all the charts that we have witnessed a short covering rally of record proportion. Last week, I ended the letter by saying not to stand in front of a freight train if the market went sharply higher. I was concerned about the new moon on October 25th and that the P Index date from the 26th. The market stopped a perfect 618 retracement in nearly all the indices on the 26th of October and for a short time from the 27th looked like the top was in. As I was flying back to the United States we had one of the strongest rallies in recent memory across the board. Several weeks ago I mentioned that 15 of the finest minds in finance were calling for a terrible recession or even worse, another depression. At that point the markets were making major pattern completions and were prepared for a rally. The rally went faster and farther than I had thought. We’re now faced with a whole bunch of new numbers from the Fibonacci sequence along with some pattern completions.
I would highly recommend everybody to look at the NASDAQ chart in this letter as it gives a perfect example of technical analysis, particularly pattern recognition and symmetry. Not only are there several AB=CD patterns present, the time related to these patterns is also equal. However, if we are strong this week all of these numbers will not make much difference as we will go higher.
The Russell Index is at the 61% retracement. Volatility Index is also forming a very nice AB=CD pattern. The Dow Jones Industrials is making a 78.6 retracement of the high. The New York Stock Exchange index is making a 61% retracement of the high. Seldom have I seen so many patterns completing around the same time. We’ll go through some others in this letter. It all boils down to this folks if we are strong this week I have made a serious miscalculation in my cycle work.

Treasury Bonds

30 Year Treasury Bonds have finally completed a 38% retracement level whole move up. The question arises as to whether we have already made the high for the year at 147 or we still have one more target to reach the 150 to 151 level. The Treasury note market has nearly the same pattern as the NASDAQ chart this week. Keep in mind that these patterns are not foolproof but when you see this much symmetry you have to start thinking of going the other way than the public.

Precious Metals

Copper was the big news this week as it held critical three dollar per pound level we mentioned several weeks ago. This week was one of the strongest weeks for copper in recent memory which was not unexpected as it followed the stock markets domestically and abroad. Gold is completing a bearish Gartley pattern in the $1775 per ounce level. Silver on the other hand has just completed a 50% retracement off the last major highs and is still lagging the market. Should gold get above $1850 per ounce it could easily start another parabolic move. This could be related to the dollar collapse if it in fact does and there is no guarantee that it will. Longer-term I have to believe that we have made major tops in gold silver and copper and should look for selling opportunities. The gold silver index is also completing a bearish Gartley pattern as of Friday’s close.

Foreign Currencies

Last week we talked about the euro making some very important Fibonacci retracement’s at the 141 level. In fact, the euro went to the exact Fibonacci level of 1.4250 on the weekly charts. The British pound is closely behind making Fibonacci retracement’s of the 161 level. US dollar index has stopped at the 786 retracement at least for a short time but going below 75 could easily set up a retest of the low at 72. Below 72 will require some major selling and if it does occur it would tell us that were probably headed for my translation and the disruption of the US dollar. This would not be good for the bond market in my opinion.

Crude Oil

Crude oil is smack up against the longer-term Fibonacci retracement at $95 per barrel. As you can see from the enclosed chart on crude oil this is an important level; going above $95 per barrel sets up $110 per barrel without too much trouble. Gasoline futures on the other hand are lagging the market badly but they did hold a critical 61% level twice this week which by looking at the chart emphasizes the importance of those numbers.

Trade of the Week

The trade of the week this week will be based on an hourly chart of IBM. Big Blue is completing a perfect Gartley pattern as of the close Friday. We want to go short IBM i.e. with a 180 Jan put or straight short selling IBM at $187.29 per share or lower. Should IBM open above 188.80 or trade there in the first hour this would not be a good position and I would exit the position. I know this sounds as clear as mud but basically what we want to do is to short IBM if it starts down below $187.29 without exceeding the 786 level near the $189 level. Use a stop and it should work out okay even if the trade does lose a small amount.

Technical Corner

The technical corner this week is going to emphasize mistakes. Last Tuesday as the markets were making a 61% Fibonacci levels at the new moon it appeared that a perfect set up was in play. In fact, the markets actually worked very well for several hours until right before the close when they rallied back to unchanged on the day. The next day on the huge gap up, Thursday, all of this made the trade a loser. There was no mistake here as a stop was placed to prevent any major loss. I did purchase the ETF for the S&P 500, SDS, based on this trade figure and placed a two dollar stop which would was at 18.76 per-share. I used 10% of the value of the stock as a stop. That does not mean that you used 10% of your equity. It is best to use a small percentage of your equity i.e. half of 1% as a guideline.
Mistakes happen to the best of all traders. Smart traders recognize their mistakes faster than other traders. Remember the Chinese proverb: a smart man learns from his mistakes but a truly wise man learns from the mistakes of others.
Mistakes are learning devices. The first mistake will teach you, the second mistake, if you make it, is the one that’s going to hurt. An example of this is getting into a position and not using a stop and then starting to rationalize why you should stay in the position as opposed to getting out as previously planned.

Final Thoughts

I mentioned several times during the course of this letter that so many patterns are coming together along with Fibonacci numbers that is truly a thing of beauty. Even if it does not work it is going to tell us something about the market. When so many things in commodities, stocks, bonds, and stock indices are telling a certain story with the patterns it means a great deal. The crash of October 1974 was a watershed for as I had watched a small fortune dissipate by making many of these errors we mentioned in the previous paragraph. I wasn’t concerned about losing all the money in 1974 because I knew I could make it back if I understood what I had done wrong. I added to losing positions, failed to use a stop, listened to the news commentators and became complacent with risk management. Actually there was no risk management and stayed with positions until I was liquidated by margin calls.